Liberate the deposit rate at the right moment

The market is waiting for steps to further liberate the deposit rate in the near future, said an article in Beijing News (excerpts below).

Lifting controls on lending rates for financial institutions means banks will compete more vigorously for custom. For high-quality clients, banks can now give a discount on loan rates.

Credit is tight and only by liberating the deposit rate, which is the core of the whole reform, can interest rate liberalization be realized.

There are three prerequisites.

First; China should establish a deposit insurance system that protects the market from huge fluctuations.

Second; banks should improve their risk management. Otherwise, the market may become chaotic. Instead of just working on mortgages and checking whether the project has government approval as a guarantee, banks should work more on client financial analysis and cash flow management.

Third; if the central bank liberates the deposit rate , the interest margin of commercial banks will shrink and bank profits may decline. It seems that the reserve ratio will decrease which is also important to finally realize interest rate liberalization.